What Is a Business Line of Credit?

A business line of credit (LOC) is a flexible loan that gives you access to a set amount of funds you can use when needed. It works a lot like a credit card: you borrow only what you need, repay it, and then the funds become available again.

LOCs are designed to help with short-term expenses and day-to-day cash flow needs, such as:

• Purchasing inventory

• Covering payroll

• Repairing or replacing equipment

• Funding marketing campaigns

Types of Business Lines of Credit

• Secured Line of Credit

  • Backed by collateral such as accounts receivable or inventory

  • Lower risk for lenders, which can mean better rates

  • If you don’t repay, the lender can seize and sell the collateral

• Unsecured Line of Credit

  • No collateral required

  • Easier for business owners, but harder to qualify for

  • Typically, smaller credit limits and slightly higher interest rates

Business Line of Credit vs. Term Loan

• Term Loan: Borrow a lump sum upfront and repay it in fixed installments over a set period. Best for long-term investments like property or equipment.

• Line of Credit: Borrow funds as needed, up to your limit, and repay them flexibly. Best for short-term needs and cash flow management.

Think of it this way: Term loans = one-time big purchases. Lines of credit = ongoing cash flow support.

How a Line of Credit Works

• You’re approved for a maximum limit (say $50,000).

• You can draw money anytime—via transfer, check, or even a business credit card.

• You pay interest only on what you borrow, not on the full limit.

• Once you repay the funds, the credit becomes available again.

💡 Many lenders charge an annual fee and may add transaction fees each time you draw funds. Some even require the balance to be paid down to zero for at least 30 days each year, to ensure you’re not fully dependent on the credit line.

Example Uses of a LOC

• Seasonal business: A landscaping company uses a LOC to cover payroll in the winter when revenue slows, then pays it back during the busy summer season.

• Marketing push: A retail store uses a LOC to launch an ad campaign that boosts sales, quickly repaying the debt with the new revenue.

• Slow client payments: A consulting firm uses a LOC to manage expenses while waiting for large invoices to be paid.

Pros and Cons of a Business Line of Credit

Pros:

• Flexible—borrow only what you need, when you need it

• Helps smooth out seasonal or uneven cash flow

• Lower interest rates compared to credit cards

Cons:

• Harder for startups or businesses with poor credit to qualify

• Risk of over-reliance—using it to cover ongoing losses can lead to debt trouble

• Defaulting damages both business and personal credit

Who Qualifies and Who Offers LOCs?

Most lenders prefer businesses that:

• Have been operating at least 2 years

• Show steady revenue and profitability

• Have good credit history

Where you can apply:

• Commercial banks and community banks

• Credit unions

• Online lenders

• SBA-backed programs (for newer businesses, under 2 years old)

Credit limits can range from $5,000 to over $500,000, depending on the lender and your business track record.

What to Know Before Opening a LOC

• Fees: Some lenders charge setup fees, annual fees, or transaction fees.

• Zero-balance requirement: You may have to pay down your balance to $0 for part of the year.

• Call provision: Lenders can sometimes demand immediate repayment, so don’t rely on a LOC as your only financial lifeline.

• Pre-approval timing: The best time to apply is before you urgently need the funds, when your business is financially stable.

How to Apply for a Business Line of Credit

Be ready to provide:

• Business financial statements and tax returns

• Personal financial information of owners

• Accounts receivable and inventory details

• A 2–3 year financial projection showing how you’ll use the LOC and repay it

A strong business plan and good credit history make approval more likely.

Key Takeaways

A business line of credit is one of the most flexible financing tools available to small businesses. It’s ideal for covering short-term needs, smoothing cash flow, and seizing opportunities without draining your working capital.

👉 Bottom line: If your business has seasonal cash flow swings or needs a financial cushion for growth opportunities, a line of credit can give you the flexibility you need—just be sure to manage it wisely.